Vijay Kumar Gaba

The Finance Ministry, in its Monthly Economic Report for July 2020, expressed guarded optimism about the economic recovery. “India is well on the path to a recovery from a trough in April, ably supported by proactive government and central bank policies. However, the increase in Covid-19 cases and subsequent intermittent lockdowns make the recovery prospects fragile and call for constant and dynamic monitoring”, the report said.

Relying on the IMD forecast of above average monsoon, the ministry expects agriculture to cushion the shock of COVID pandemic on the Indian economy in 2020-21. It is pertinent to note that agriculture contributes about 15 per cent of total gross value added. As per the ministry's estimates, a record procurement of wheat for Rabi season 2019-20 has enabled a flow of around Rs. 75,000 crore to the farmers which will boost private consumption in rural areas. Incraesed flow of funds due to higher crop, better MSP, a slew of agriculture sector refomrs, and massive rural sector stimulus, has moved the terms of trade in favour of agriculture and has reinforced rural demand. This has also manifested in an increase in rural core inflation between March and June 2020.

The Finance Ministry believes that "With India unlocking, the worst seems to be over as high-frequency indicators show an improvement from the unprecedented trough the economy had hit in April 2020. These include Index of Industrial Production (IIP), Purchasing Managers Index (PMI), power generation, production of steel and cement, railway freight, traffic at major ports, air cargo and passenger traffic, e-way bill generation capturing inter-state movement of goods, consumption of petroleum products and motor vehicle registration among others. However, risks on account of rising COVID-19 cases and intermittent state lockdowns remain."

As per the brokerage firm Nomura Securities, "While business resumption remains stuck at ~30pp below normal, hard data released so far have improved in July." The brokerage firm believes that "the uptick in July activity data reflects continued post-lockdown normalisation and pent-up demand, with most of it caused by a stronger recovery in rural demand. With daily cases continuing to pick up both nationally and in traditionally safer states (in the south and the east), the freeze in the Nomura India Business Resumption Index (NIBRI) indicates a growing risk that the sequential improvement in activity could taper."

An analysis of corporate results for 1QFY21 declared so far and management commentary post results also indicates that good monsoons and rural buoyancy have aided the margin of most consumer and auto companies have been aided by the buoyancy in rural demand.

Given this reliance on rural demand for overall economic recovery and corporate earnings revival, the tracking of monsoon becomes critical. Any disappointment on that front could rattle the fragile recovery and buoyancy in the stock markets.

So far, the monsoon trends have not been encouraging. As per the data released by IMD, till 04 August 2020, the country has witnessed 2% deficiency in the rainfall. The spatial distribution of monsoon has been rather bad. All 10 states in the North West region have witnessed 0% to 63% deficiency in rainfall. In the Central region, 6 out of 8 states are deficient. In South rains have been good, except in Kerala which faces 18% deficiency so far.